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Open border faces challenge Research group says U.S. hunger for energy security may ‘provoke disputes’ Gary Park Petroleum News Calgary Correspondent
A decade of “spectacular,” largely trouble-free energy trade between the United States and Canada could be entering a period of turbulence, warns a study by the C.D. Howe Institute, a respected Canadian research group.
As the United States presses ahead with policies to develop secure North American oil, natural gas and electricity supplies in response to Sept. 11, there’s a growing danger that Congress will adopt a more interventionist role at a time when the energy industry is facing a new challenge of “sustaining current (production) levels, rather than adding appreciably to them,” the report said.
The findings reflect growing edginess in Canada as production of oil and gas from the mainstay Western Canada Sedimentary Basin starts a steady decline, leaving a Mackenzie Valley pipeline, the Alberta oil sands “bounty” and the East Coast offshore as Canada’s only significant new developments on the horizon to sustain exports.
One of the key points of friction could involve conflicting views over how best to develop and deliver North Slope and Mackenzie Delta gas to southern markets, especially if U.S. legislators press ahead with as much as $10 billion in federal loan guarantees to spur construction of an Alaska Highway pipeline, the researchers suggested.
The upshot could be cross-border tension, demands in Canada for a return to government controls and the first serious re-examinations of the 1989 bilateral free trade agreement between Canada and the U.S. and the 1994 trilateral North American Free Trade Agreement embracing Canada, the United States and Mexico.
“Canadian governments and regulatory bodies face formidable challenges if the trend to freeing energy markets is to be sustained,” said energy economists Paul Bradley and G. Campbell Watkins, co-authors of the report, Canada and the U.S.: A Seamless Energy Border?
“A U.S. government that displays a tendency to be more interventionist, at the possible expense of market-determined investment or trade patterns, may provoke disputes for which the NAFTA should provide the process for resolution. Time will tell whether that agreement is robust enough to ensure fair play of Canadian interests versus those of the U.S.”
The authors have little doubt that a “more assertive U.S. administration will challenge Canadian understanding of the significance of continental energy integration.” They said that although NAFTA “encourages open trade, it by no means erases the border between the United States and Canada.” Mixed bag However, the authors said greater emphasis on energy security by the United States “provides a platform that could enable Canada to better press its interest in securing favorable access to the U.S. market and in sharing the benefits and costs of further market integration. Energy is one sector where Canada can negotiate from a position of strength.”
They suggested that leverage could strengthen Canada’s negotiating position on subsidies for Alaska gas or determining the pipeline route.
“Would adopting the U.S. (loan guarantee and minimum floor price) proposals contravene NAFTA, thereby offering a possible avenue of redress for Canada?” they asked.
“Certainly, a government awarding minimum price levels to a region and bestowing special favors on one route over another where both traverse the territory of another NAFTA party appears contrary to the spirit of the agreement.
“Would the measures violate the letter of the agreement as well? Opponents could point to the no-minimum-price provision for traded energy and to the admonition for regulators to avoid disrupting contractual relationships.
“Proponents could argue that a floor price would be solely a U.S. domestic matter — the gas might traverse Canada but would not be traded.
“Moreover, the provisions could be seen as needed to develop supply and maintain a reserve base.
Researchers said they “see the position of the Canadian government as having some merit: the U.S. proposals would undermine market mechanisms enshrined in NAFTA, although a hands-off, let-the-market-decide notion is perhaps too facile for such a high-risk, expensive project.”
The study noted that the value of Canada’s oil, gas and electricity exports climbed from C$10.1 billion in 1991 to C$44.9 billion in 2001. This included C$25.6 billion from 3.82 trillion cubic feet of gas (compared with 1.59 tcf in 1991) and C$16.08 billion from 499 million barrels of oil (compared with 274 million barrels in 1991).
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